Hang Seng and Nikkei 225 Diverge Amid AI Buzz and Tech Stock Losses

US Markets React to China’s DeepSeek Ascendancy

US equity markets experienced a volatile start to the week following news of Chinese AI platform DeepSeek surpassing ChatGPT on Apple’s App Store downloads. DeepSeek, known for its low-cost AI model, raised questions about the sustainability of AI development spending and US tech stock valuations.

On January 27, the Nasdaq Composite Index and the S&P 500 posted losses of 3.07% and 1.46%, respectively. Meanwhile, the Dow gained 0.65% on demand for defensive stocks.

Strong Economic Data Highlights US Resilience

The Dallas Fed Manufacturing Index and Chicago Fed National Activity Index beat forecasts, reflecting stronger economic activity. Additionally, New Home Sales signaled robust demand. Economists consider the housing market a barometer for the economy.

Monday’s data could test market bets on a dovish Fed policy stance. A higher-for-longer Fed rate path may raise borrowing costs, affecting company earnings and valuations.

DeepSeek Fuels AI Sector Debate

DeepSeek continued to draw market debate on Tuesday after impacting the US markets. Brian Tycangco, editor and analyst at Stansberry Research, shared comments from Sam Altman on DeepSeek’s AI model, saying,

“Invigorated and excited… or panicking and hyperventilating? I guess only time will tell.”

Sam Altman stated:

“DeepSeek’s r1 is an impressive model, particularly around what they’re able to deliver for the price. We will obviously do much better models and also its legit invigorating to have a new competitor! We will pull up some releases.”

Tycangco singled out Baidu Inc. (9888.HK) as the next company to watch in China’s tech and AI space.

Hang Seng Index Gains Amid Pre-Holiday Trading

The Hang Seng Index gained 0.14% on Tuesday morning. China’s AI story boosted demand for tech stocks. However, real estate stocks struggled ahead of Wednesday’s Fed interest rate decision. Elevated borrowing costs and uncertainty about China’s real estate market remained headwinds ahead of the Lunar New Year holidays.

The Hang Seng Technology Index advanced by 0.77%. Tech giant Baidu (9888) rallied 3.66% on AI sentiment. Alibaba (9988) and Tencent (0700) rose 1.26% and 1.65%, respectively.

China’s mainland equity markets remain closed for the Lunar New Year, resuming trading on February 5.

Nikkei Index Stumbles as Tech Stocks Extend Losses

Japan’s Nikkei Index slid by 1.06% on Tuesday morning despite the USD/JPY pair rallying 0.87% to 155.833. DeepSeek AI platform’s climb in the rankings continued impacting Japanese tech stocks. Tokyo Electron (8035) and Softbank Group Corp. (9984) were down 4.75% and 5.18%, respectively, pulling the Index into negative territory.

ASX 200 Gets Banking Sector Boost

Australia’s ASX 200 Index edged 0.08% higher on Tuesday morning. Banking sector gains countered heavy gold and oil-related stock losses.

10-year US Treasury yields dropped below 4.5% on Monday, boosting demand for high-yielding Aussie banks. The National Australia Bank (NAB) and Westpac Banking Corp, advanced by 1.27% and 1.29%, respectively.

Meanwhile, Monday’s fall in gold and oil prices left Northern Star Resources (NST) and Woodside Energy Group (WDS) down 1.95% and 0.45%, respectively.

Outlook: Risks and Opportunities Ahead

Geopolitical tensions, US tariff policies, and evolving AI competition will influence market sentiment. While tech and AI stocks may outperform, trade-sensitive industries like mining could face heightened volatility. The HK, Mainland China, and ASX 200 could rally if China avoids tariffs and China’s AI space evolves. Conversely, tariffs could impact risk sentiment, potentially overshadowing AI’s tech stock boost.

Discover strategies to navigate this week’s market trends here.